Step cautiously into an online bank
Interest rates and convenience are high, but so are security concerns. And customers have to be especially vigilant.
For savers looking to get the highest possible interest rates on their cash holdings, the call of the Internet keeps getting louder.
In March, ING Direct launched nationwide the first completely electronic checking account. Depositors receive 4 percent interest on balances up to $50,000 and have no minimum requirements. This month, HSBC plans to roll out its own high-yield electronic checking account with an interest rate that's soon to be announced.
High-yield checking accounts mark the latest enticing offer from a universe of about 60 domestically registered virtual banks, which conduct business online rather than in brick-and-mortar operations. Virtual savings accounts now routinely pay 5 percent or more. Deal hunters are also finding mortgages with reduced fees and higher than average rates on certificates of deposit.
Taking advantage of virtual bank products, however, involves more than just a few clicks of the mouse. Vigilant maintenance of computer security systems is a must for anyone with a virtual account, say bankers and security experts. And even then, experts differ about what's the best way to manage accounts in order to maximize returns while minimizing risks.
Some financial advisers urge clients to follow the money. A person who isn't carrying high-interest debt and wants to keep cash on hand for a rainy day should consider putting most of the cash in virtual accounts, according to Bill Driscoll, a financial planner in Plymouth, Mass. The reason: high returns and low risk.
"There's absolutely no commitment. Why wouldn't you take advantage of it?" Mr. Driscoll asks. On the matter of security, he says, "You have just as much risk in a regular bank as you do with an Internet bank [because] they're all using the Internet for electronic information and for transmitting data."
But others disagree. Security consultant Andrew Colarik, who has written three books on cyberterrorism, says anyone with a virtual account should use it solely to pay one month's bills and keep the rest in accounts that aren't accessible online. That way a depositor limits risk of loss, he says, since "we keep taking for granted that all of this technology has been perfected, and it hasn't been."
"A higher interest rate means a higher risk, and somehow we have disconnected this" from current thinking about virtual banks, Mr. Colarik says. "If there is a breach, if there is a violation, what is your recourse?" In most cases, he says, chances are "you lose your money."
To date, the largest Internet banks report solid safety records. HSBC and ING Direct, for instance, both say they've never had a customer lose any funds due to a security breach. And even when Emigrant Direct's website was down for days last summer, customers didn't lose their money, although some complained of difficulty accessing funds.
What's more, in an age of concerns about identity theft, some advisers believe clients are actually more secure using virtual banks. The absence of a paper trail, which follows traditional banking transactions, reduces the likelihood that a thief will find valuable account numbers or passcodes in garbage bins, according to Justin Pritchard, a financial planner in Denver. And even paper checks have their downsides.
"It's worse to hand someone your paper check than it is to hand someone your user name and password of your online account," says Jim Bruene, editor of Online Banking Report, an industry newsletter. "That paper check not only has all your [contact] information on it, it has your checking account number on it. Your bank account number is right there, printed on the check," which could enable a counterfeiter to manufacture checks and drain an account of funds.
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